Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Blue Llama Mining Company is evaluating a proposed capital budgeting project (project Sigma) that will require an initial investment of
$900,000.
Blue Llama Mining Company has been basing capital budgeting decisions on a project's NPV; however, its new CFO wants to start using
the IRR method for capital budgeting decisions. The CFO says that the IRR is a better method because returns in percentage form are
easier to understand and compare to required returns. Blue Llama Mining Company's WACC is 9%, and project Sigma has the same risk
as the firm's average project.
The project is expected to generate the following net cash flows:
Year
Year 1
Year 2
Year 3
Year 4
Cash Flow
$300,000
$425,000
$475,000
$450,000
Which of the following is the correct calculation of project Sigma's IRR?
O23.18%
27.27%
O24.54%
O 30.00%
If this is an independent project, the IRR method states that the firm should
If the project's cost of capital were to increase, how would that affect the IRR?
O The IRR would increase.
O The IRR would not change.
O The IRR would decrease.
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Transcribed Image Text:Blue Llama Mining Company is evaluating a proposed capital budgeting project (project Sigma) that will require an initial investment of $900,000. Blue Llama Mining Company has been basing capital budgeting decisions on a project's NPV; however, its new CFO wants to start using the IRR method for capital budgeting decisions. The CFO says that the IRR is a better method because returns in percentage form are easier to understand and compare to required returns. Blue Llama Mining Company's WACC is 9%, and project Sigma has the same risk as the firm's average project. The project is expected to generate the following net cash flows: Year Year 1 Year 2 Year 3 Year 4 Cash Flow $300,000 $425,000 $475,000 $450,000 Which of the following is the correct calculation of project Sigma's IRR? O23.18% 27.27% O24.54% O 30.00% If this is an independent project, the IRR method states that the firm should If the project's cost of capital were to increase, how would that affect the IRR? O The IRR would increase. O The IRR would not change. O The IRR would decrease.
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